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10-53 Solutions
10.34 continued.
b. Plan (1):
Asset—Cash.
Plan (2): Operating Lease Method: None.
c. $150,000 = $100,000 Depreciation + (.10 X $100,000 X 5) Interest.
e. The method of accounting for a lease affects only the timing of expenses,
interest expense is smaller.
f. (1) $30,000 = $20,000 depreciation + $10,000 bond interest.
g. (1) $30,000.
Solutions 10-54
10.34 g. continued.
CAROM SPORTS COLLECTIBLES SHOP SUMMARY
(Not Required)
2008 2009 2010 2011 2012 Total
Plan 1
Depreciation
Expense ........... $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 100,000
Plan 2 (Operating)
Plan 2 (Financing)
Depreciation
Interest
10.35 (Northern Airlines; financial statement effects of capital and operating leases.)
(Amounts in Millions)
a. Capital Lease Liability, December 31, 2007 ........................... $ 1,088
Plus Interest Expense (Plug) .................................................. 102
aA comparison of the commitments under capital leases on December
10-55 Solutions
10.35 continued.
d. December 31, 2008
Interest Expense ........................................................ 102
10-57 Solutions
10.35 continued.
f. Present Value of Operating Lease Commitment on
December 31, 2007
Present Value
Year Payments Factor at 10.0% Present Value
2008 $ 1,065 .90909 $ 968
aAssume that the firm pays the $7,453 at the rate of $815 a year for 9.145
(= $7,453/$815) periods at 10%.
Present Value of Operating Lease Commitment on
December 31, 2008
Present Value
Year Payments Factor at 10.0% Present Value
2009 $ 1,098 .90909 $ 998
Solutions 10-58
aAssume that the firm pays the $6,710 at the rate of $855 a period for 7.848
(= $6,710/$855) periods.
10-59 Solutions
10.35 continued.
g. Long-Term Debt Ratio Based on Reported Amounts:
h. Long-Term Debt Ratio Including Capitalization of Operating Leases:
10.36 (FedUp Corporation; financial statement effects of capital and operating
leases.) (Amounts in Millions)
a. Capital Lease Liability, May 31, 2007 ..................................... $ 401
Plus Interest Expense: .05 X $401 ......................................... 20
c. During Fiscal 2008
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+10
+10
To record new capital leases signed.
May 31, 2008
Solutions 10-60
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–121
–101
–20
IncSt → RE
To record interest expense on capital leases, the cash
payment, and decrease in the capital lease liability for
the difference.
10-61 Solutions
10.36 c. continued.
May 31, 2008
Depreciation Expense ............................................... 133
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–133
–133
IncSt → RE
To recognize depreciation expense on capitalized
leased asset for 2008.
d. May 31, 2008
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–1,646
–1,646
IncSt → RE
To recognize rent expense on operating leases for
e. Present Value of Operating Lease Commitment on
May 31, 2007
Present Value
Year Payments Factor at 5% Present Value
2008 $ 1,646 .95238 $ 1,568
aAssume that the firm pays the $7,249 at the rate of $1,045 per period for
Solutions 10-62
10-63 Solutions
10.36 e. continued.
Present Value of Operating Lease Commitment on
May 31, 2008
Present Value
Year Payments Factor at 5% Present Value
2009 $ 1,672 .95238 $ 1,592
bFactor for the present value of an annuity of $984 million for 6.890
cFactor for the present value of $1 for five periods at 5%.
f. Long-Term Debt Ratio Based on Reported Amounts:
g. Long-Term Debt Ratio Including Capitalization of Operation Leases:
Solutions 10-64
10.37 (GSB Corporation; measuring interest expense.)
Solving for BB:
Thus, interest expense for this last six month period equals $5,447.62 (= .05 X
